Ever since the Great Recession happened 10 years ago, wiping out pensions and 401k (morbidly turning them into 201k) and other savings, people have been looking for more ways to diversify their investments. Many young people due to these circ*mstances have no retirement saved and are saddled with thousands of dollars of school loans. The stock market has lost its appeal, you’re a full time freelancer or self-employed which means no employing company will match your investments into a 401k. The real estate market is looking more desirable for the new investor. But, one of the first decisions to make is where you want to invest. It’s important to understand the basics between personal real estate vs. commercial real estate.
Let’s look at the pros and cons:
Personal Real Estate
“Personal real estate is what I’d consider to be the smaller properties and a good start for someone looking to get involved in real estate whether it’s your primary residence or investment property. Single family properties, 2-4 family properties and condos. Conventional financing will work here and they focus more on the borrower with some consideration to what’s being purchased.” – Brett Sikora
Personal real estate Pros:
1. Sweat equity
If you are a handy guy or gal and love watching HGTV and DIY, you could potentially save yourself a lot of money on repairs, refurbishing and upgrades, which will help you win money in the end! You could buy a fixer-upper and have it as your weekend project for a year or two. By the time you are ready to sell it, you may have doubled its value! In the past 2 ½ years of owning my current home, I’ve planted over 200 trees, bushes and perennials on my property. I am doing it because I love it, but every sore muscle and scabbed knuckle is adding money to my home.
Even if it’s in pretty good shape, slapping on a fresh coat of paint, adding some bright accent colors or doing some simple landscaping can add valuewhen you show the house to sell or rent. (When my parents bought our childhood home, the sellers had marinara sauce simmering creating that “homey” feel and hoped it would close the deal. Total investment: $1.69.)
2. Appreciate the appreciation
There is always an area of the country that is facing insane housing growth. Currently, I’m right in the middle of it in Jersey City, NJ, part of the metro-NYC area. We bought our house in 12/14 for $270k, right before our particular area hit (this was our goal). We had it recently appraised and it came in at $465,000. Granted, there is always risk in buying on potential appreciation, but when it hits, it HITS!
Do your homework. Research trends, use Zillow and Trulia and get your boots on the ground when you can. This will educate you to your particular market so that you can be ready to jump on something the moment it presents itself.
Personal Real Estate Cons:
1.You are now a landlord
Becoming a landlord is like picking up a second job. Maybe it’s an easier job, but you might also get the tenant from hell. In a best case scenario, you still need to learn to become a super or hire someone to do it for you. This involves time, skill, money, and stress. In its best case, you’ll need to do minor upkeep, collect the rent and be available at almost all times in case of a tenant emergency like flooding or no heat. In the worst cases, you could have a tenant that refuses to pay and have to face months of trying to get them evicted while receiving no income from your rental property.
2. This is your “ride or die” property
Meaning, you have used up almost all of your liquid assets and collateral to purchase this property. You have made a choice to be intimately involved with this property for a number of years. And while you could have done all the research in the world on your property, there is no real way to forecast what the future brings. Your property will be heavily dependent on the rental market which can be influenced by countless factors, whosome never planned for. Imagine if you closed on a great condo in lower Manhattan in early 2001…
Commercial Properties
“Commercial is when you’re 5 residential units or larger,a full office building or warehouse, oryou have a mixed use property that combines retail/office/warehouse with residential. Financing is different for these. They focus more on the asset’s performance and less on the individual borrower. The better the track record, the better the rates and LTV. I prefer using a broker when searching for financing on commercial deals. They can usually find the best product for whatever it is you’re looking to accomplish.” – Brett Sikora
Commercial Real Estate Pros:
1. Borrow at a lower rate than you are being paid
Since you are dealing with more money, there are more ways to structure your payments and investments. If the numbers are right, you can put a “positive leverage” on a property. Simply, you borrow $20 from your friend and he asks for $21 back, a $1 interest rate. You now take this $20 and lend it someone else with a $2 interest rate. Paying back your friend, you pocket your extra dollar, content in the fact that you just got to engage in positive leverage. In commercial real estate, this is just practiced on a much larger scale.
2. Land + Building = 2 ways to win
When you own a piece of commercial property, in effect, you own two things. You own the building and you own the land. In the future, you can sell the building yet keep the land. My father sold a piece industrial/commercial building yet maintained the property it was on. Now he didn’t have the headache of managing the industrial building, yet was still able to receive income on the land, which had already been paid off years ago.
Commercial Real Estate Cons:
1. It can be a real time suck
If you are dealing with a building in which you have multiple tenants, you are vastly multiplying the time and mental bandwidth it would consume with a smaller residential property. This is your property, so ultimately, if you have unhappy tenants, the buck stops with you. You’ll need to review and execute multiple leases, address grievances, do preventative maintenance and more if you expect to generate good returns. And if you’re not a good landlord, the public can easily turn its collective eye to you, and that’s never good.
2. Mo Money, Mo Money, Mo Money!
Commercial spaces are not cheap. They usually involve an order of magnitude more of investment than a smaller property. Not only do you need to have more on hand to put down, but you’ll most likely have to invest into the property itself, either at the beginning or on a continuing cycle. More money will be coming in and more money will be going out. The goal is that with multiple clients, the no one thing with one client will bankrupt you as the others will help to mitigate it. However, if you suddenly need a new heating unit, nobody is going to help mitigate that!
Was this insight into personal real estate vs. commercial real estate helpful for you? Let us know in the comment section below!
